If you are an employer or work in the payroll department of a business, you will probably need to know how to determine the relevant taxes to deduct from an employee’s payroll check. Each deduction, which includes Social Security, Medicare, federal income tax and state income tax, operates by its own calculation. Medicare and Social Security are figured as straightforward percentages of the employee’s pay. State and federal taxes, on the other hand, can be a lot more complicated. Fortunately, many software and web tools are available to help you.

Payroll Calculators on the Web

Online payroll calculators can help you figure out the needed deductions from employee paychecks. Most of these online services, such as PaycheckCity, Paycheck Manager and Intuit’s Paycheck Calculator (links in Resources), allow you to enter a worker’s pay data, including pay type, hours worked and federal and state withholdings, then determine an estimate of the deductions. These calculators are not guaranteed to be accurate and shouldn't be used in an official capacity, but they are helpful as a quick means to calculate tax deductions.

Payroll Software Packages for Businesses

A reliable payroll software system means ease and accuracy in calculating deductions, with less risk of errors. Companies can either keep their payroll processing in-house or outsource it. If you choose to handle payroll in-house, you have many options for selecting a payroll software package. In choosing the software you need, consider the cost, the usability of the interface and the assortment of features that you wish to use. Regardless of which brand of software you choose, comprehensive payroll software will include Medicare and Social Security percentages and the most up-to-date tax tables. Your payroll system should allow you to enter all of your employee wage information (including bonuses, W-4 deductions and how often the employee is paid), and also benefits like health coverage, paid vacation, time off, moving expenses and retirement plans. When you’ve entered all of your employees’ data, the system will calculate gross wages, state and federal taxes, Medicare and Social Security withholdings, any other deductions and the final take-home pay amount for each person. Many payroll software packages can even print paychecks (or directly deposit pay into employee bank accounts), send the payroll data to your company’s accounting system, and generate tax forms for both you and your employees.

IRS and Social Security Administration Tools for Figuring Deductions

Some employers or company payroll departments choose to figure federal taxes by hand, and all of them should at least know how to do it if the need arises. To help you accomplish this task, the Internal Revenue Service issues a document called the Circular E, which is the Employer’s Tax Guide (link in resources). The Circular E includes a checklist of employer responsibilities, Social Security and Medicare tax rates, federal tax withholding tables that can be figured based on each employee’s wages and filing status, procedures for paying and reporting taxes, and all other necessary information. If you prefer to get information about Social Security and Medicare withholdings directly from the source, those percentages are available on the Social Security Administration’s website, but registration is required to use the site (link in Resources).

State Tools for Figuring Deductions

Not all states require income tax to be collected, but for those that do, the tax rates and rules can vary widely. Fortunately, each state has a revenue agency that provides information about required withholdings, including tax tables and forms, so you can figure what state income tax deductions are needed from you and your employees. Links to all state tax agencies are available on the Federation of Tax Administrators website (link in Resources), so you can select your state and then access the correct information.

About the Author

Erica Kasper has been a professional writer and editor since 1999. Based in Jacksonville, Fla., she has written and edited educational, marketing and web copy for nonprofit organizations, technology companies and online marketing firms. She has a Bachelor's degree in journalism (honors) and psychology from Washington and Lee University.